Let's start with a question: How much of your portfolio is stashed in foreign stocks?
If you're like most Americans, you probably said "about 17%." That's the amount of total U.S. investment in foreign issues. But now for the really important question: Is that enough?
Well, is it?
Not according to Dr. Jeremy Siegel of the Wharton School of Business. He's earning notoriety by telling U.S. investors to put as much as 40% of their portfolios into foreign stocks. That's right. 40%!
And though Charlie Munger has had some fun at Siegel's expense, calling him "demented," I think Siegel is spot-on in this regard.
Well, maybe not spot-on -- 40% may be a bit high. But this is America, darn it! If we don't use hyperbole ...
Back to your regularly scheduled article
While 40% may be aggressive, there's no reason American investors should not be making foreign stocks at least 20% to 30% of their portfolios. After all, domestic growth is slowing, and capital is flowing out of the United States and into other countries as never before.
Accordingly, you will be left behind if you are not invested in the world's best stocks.
Your portfolio check-up
So how can you measure how much of your portfolio is invested in international stocks? It's an inexact science. Microsoft, for example, is an American icon, based in Redmond, Wash., with 44,000 employees in this country, that trades on the U.S.-based Nasdaq. Yet it's sort of an international stock.
The company has 27,000 international employees, pays 15% or so of its income taxes abroad, and derives a "significant" amount of revenue from other countries. When you're checking your portfolio for international allocation, I'd consider about 30% of a Microsoft holding "international."
It's important to do this math with every stock you own, regardless of where the company is based. Unilever (NYSE:UL) and Vodafone (NYSE:VOD), for example, are based in Europe, but they do business around the globe. Allied Irish Banks (NYSE:AIB) and Ryanair (NASDAQ:RYAAY), however, have their operations concentrated almost completely on the continent. And American companies such as Ford (NYSE:F) and Liz Claiborne (NYSE:LIZ) are seeing their revenue mix become less and less "American" by the day.
Add it up
But even if 20% of your stock portfolio is in foreign issues, it may not be enough. Remember: Your investments don't exist in a vacuum.
Consider this scenario: You live in Houston. You work for Enron. You invest in nothing but Enron stock. When Enron went bankrupt, you were not only out of a job, but your savings were wiped out, and there wasn't anyone around who wanted to buy your house.
Or what about this one: You live in New Orleans. You work in New Orleans. You invest in nothing but New Orleans-related companies such as Whitney Holding, Entergy, and Harrah's Entertainment. Thankfully, the region and many of its businesses are bouncing back. But in the wake of Hurricane Katrina, you could have found yourself out of a house and a job, and seen your investment accounts significantly down.
Enron, New Orleans ... the United States?
Simply put: When every part of your financial well-being is tied to one place, you increase the risk of disaster. So if you own a home in the United States and earn your living from an American corporation, take that into account when deciding how much foreign exposure you need in your portfolio.
You might even find yourself approaching Siegel's magic number of 40%.
The Foolish bottom line
When you do, you may find out that you're severely underinvested in foreign stocks. That's precisely why we're offering our new investing service, Motley Fool Global Gains. There, Bill Mann and his team of analysts make it their mission to uncover the best international equities on the market. They'll also help you calibrate your portfolio to ensure that you have all of the international exposure you need.
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This article was originally published on Oct. 30, 2006. It has been updated.
Tim Hanson does not own shares of any company mentioned. Microsoft and Vodafone are Inside Value recommendations. Unilever is an Income Investor choice. The Fool's disclosure policy speaks seven languages, including Latin.
